The Tax Cuts and Jobs Act, the sweeping new federal tax law enacted at the end of December 2017, contains a provision that will likely have a significant effect on how employers resolve claims involving sexual harassment.

Section 13307 of the Act eliminates the business deduction for: (1) any settlement or payment related to sexual harassment or sexual abuse that is subject to a confidentiality agreement; and (2) attorney fees related to such a settlement. The provision applies to settlements, payments, and attorney fees paid or incurred after the date the law was enacted.

Section 13307 leaves open questions as to whether deductions are eliminated for confidential settlements involving multiple employment claims, where only one of the claims is sexual harassment. Also unclear is whether related claims arising out of sexual harassment or sexual abuse, such as assault, battery, and intentional infliction of emotional distress, are covered by Section 13307.

In addition, while it seems unlikely, it is not clear that Section 13307 only affects the employer's tax deductions. Although Section 13307 amends Section 162 of the Internal Revenue Code, which addresses the deduction of business expenses, it could result in the elimination of any deduction by the victim for attorney fees incurred that are paid by the employer.

Employers seeking to preserve their tax deductions for payments made and attorney fees incurred in connection with sexual harassment and related claims may do so by not including confidentiality provisions in their settlement agreements. However, confidential settlements of multiple or related claims will require careful analysis to avoid running afoul of the new law. Employers settling such cases are well advised to consult their legal and tax professionals before including any kind of confidentiality provision.

Ater Wynne's employment group can help with settlement and prevention strategies.